Last summer, I was sitting in the conference room overlooking the Hong Kong Harbour for the daily morning market meeting when a trader named Chap Dog began speaking about his take on the market. He went through a variety of currency pairs, all of which were essentially flat for the year at this point, highlighting the mean reverting nature of the currency market at that time. The Chap Dog was spot on, which I expected, given that he is one of the best traders I have seen in action.
Fast forwarding to the summer of 2013, I believe these rules are changing. Rather than mean reverting price action, I am expecting trending price action, especially in the commodity currencies of the AUD (NYSEARCA:FXA), CAD (NYSEARCA:FXC), MXN (FXM) and NZD. Below is a chart of the CAD to demonstrate the price action I am speaking of.
From 1994 to 2000, the USDCAD rallied (a CAD depreciation) from 1.30 to 1.60. This trend reversed in 2001 with the onset of the commodity boom, causing the USDCAD to fall (a CAD rally) from 1.60 to 0.95 by 2007. There then is the anomaly of 2008, but other than that, the CAD has been contained between 1.05 and 0.95 since mid-2008.
Similar price action can be seen in the AUD.
These are monthly charts, and of course on shorter time frames money can be made both short and long, but it is important to be cognoscente of the long term trend as it enhances your ability to quantify risk. Knowing the long term trend and being on the right side of it increases the probability of profitable currency trading.
The End Of The Commodity Boom Is Upon Us
The driver of the depreciating of the AUD and the CAD is the fall in commodity prices. This can most evidently be seen in gold and copper, but is true across other commodity classes. Year to date, commodities are getting killed, while equity futures are booming, much like in the deprecation of these currencies leading up to 2001.
Retail FOREX traders are slow to recognize this shift in the state of the world, continuing to buy the dip in the CAD, AUD and especially silver, and I suspect loosing big money in the process. As unfortunate as it is, the fact that retail traders have not clued in is a good sign. It is always good to be on the other side of their trades, as 80% of retail FOREX accounts are not profitable.
Rather than placing mean reverting trades in the commodity currencies, look to buy into the longer term trend and sell any rallies. What has worked since mid-2008 will not work forever, and it appears the time for change is upon us. In terms of particular levels, if you can manage to get long the USDCAD at 1.045 and short the AUDUSD at 94, I believe you will be handsomely rewarded.
Disclosure: I am short FXC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am actively trading FOREX and CFDs and may either be long or short the instruments discussed at the time of this article's publication. To see a complete list of my open trades in real time, visit mcnultycapitalmanagement.com.